Downtown On a Budget: Nonprofits and Others Stand to Gain From Downtown’s Inventory Changes

Traditionally, nonprofit organizations have preferred to remain in Manhattan, largely due to its centralized location. Cassidy Turley predicts this trend will continue over the next decade, especially as the other commercial submarkets in New York City and surrounding areas, including downtown Brooklyn, Long Island City, the Bronx and Upper Manhattan, do not have significant office supply and as a result their rental rates may not be as affordable as downtown Manhattan.

With its reasonable asking rents, diverse building inventory and exceptional accessibility to the outer boroughs and nearby suburbs, downtown has traditionally been an attractive home for nonprofits that may have otherwise been priced out of midtown and midtown south submarkets.

Over the past 20 years, pricing in the downtown and midtown markets has varied; downtown Class B space has always proven less expensive over the past 20 years and especially over the past 10 years, and during the last boom period, from 2006 to 2008. Downtown Class B office space has typically been less volatile than downtown Class A office space, showing less of a spike up or down with market changes.

In addition to losing 15 million square feet of Class A office space post-9/11, downtown has also lost 15 million square feet of inventory due to residential conversions over the past 15 years; 10 million square feet of which was Class B inventory. As a result, Class B prices have not declined as much as expected during the past two economic downturns. Downtown Class B pricing still remains 19.9 percent below that of downtown Class A pricing.

Cassidy Turley anticipates significant additions to the supply and availability of office space downtown. A number of large financial firms currently have or are anticipated to downsize or vacate space in Lower Manhattan. As the World Trade Center is rebuilt, it will result in 4.7 million to 9.1 million square feet of new office space added back to the downtown submarket.

There are several current and potential large blocks of available space downtown that are greater than 500,000 square feet that could be added to the market through 2014, which in turn may result in price reductions for smaller Class B office buildings over time.

AFTER A PERIOD of dark forecasts, including prognostications of large-scale job losses, tenant contractions/bankruptcies, spiking space vacancies and plummeting rents, Manhattan seems to have weathered the storm. The economy, especially in Manhattan, has begun a relatively rapid rebound in 2010, with local employers adding more than 50,000 private-sector jobs in the first half of 2010. There has been little new construction over the past decade in Manhattan, which has certainly helped speed the recovery.

Downtown is one area adding new inventory, including 7 World Trade Center, 200 West Street, 1 World Trade Center and 4 World Trade Center. Tenants who desire new, modern, green or technologically advanced office space will be inclined to gravitate to downtown.

The big blocks of space coming back to the market would take an extended period of time to be absorbed by occupier demand. According to Cassidy Turley, there are a number of different potential vacancy rate trends for downtown, which vary based on different lease renewal assumptions and office absorption, or the overall amount of space that is leased up compared to space that is added to the market.

Based on historical experiences, Cassidy Turley expects space additions to the downtown office market to put pressure on landlords of downtown Class A space to reduce their prices, to keep their buildings occupied, ignoring the politically charged question of whether the government-sponsored or government-subsidized office buildings will undermine rental pricing, as occurred during the original trade center lease-up decades ago.

Tenants who can afford to improve the quality of the space they occupy will be financially motivated to move from lesser-quality Class B space into newer, higher-quality and perhaps better-located Class A space in downtown.

This in turn will require downtown Class B owners to reduce their pricing to compete for the now-smaller pool of Class B tenants. This is the space that we anticipate nonprofits will be able to lease at favorable rates, assuming the organization is sufficiently stable from a head-count perspective to commit to a lease for at least the next decade.

For nonprofits and other budget-sensitive companies with leases expiring in 2011 and 2012, now is the perfect time to prepare a real estate occupancy plan. To maximize the benefits of anticipated lower rents and the availability of more space options, downtown Manhattan should be included as part of any space survey, and such a plan should be implemented in 2011.

David Lebenstein is a senior managing director and the director of the not-for-profit division at Cassidy Turley.